Keep an Eye Out for Small-Cap Deals

By George Leong, B.Comm. Published : June 9, 2008

Stock markets continue to trade cautiously with swings in both directions, although the overriding bias is negative, with selling surfacing after major upside moves. The DOW had two straight 100-point declines last Monday and Tuesday prior to some buying on Thursday, as the barometer of blue-chip performance wavered subsequent to closing above 13,000.

In the housing market, a report was released that continued to paint a dismal picture with home foreclosures and late payments at a record for the first quarter. The declining wealth in the housing market will continue to impact consumer spending and economic growth.

There has been some optimism in the small-cap sector, as the Russell 2000 has rebounded and is showing decent technical strength at this point. After being down over eight percent, small- cap stocks have been on a revival streak, trending higher. They are currently leading the large-cap and technology issues this year with a marginal three-percent decline, compared to nearly six percent for technology stocks and over six percent for large-cap stocks. The rebound in small-cap stocks is driven by improved optimism that the U.S. economy may avert a recession this year.

My feeling is that small-cap stocks will continue to outperform in the longer term. Historical statistics reflect this. The key for you as an investor or trader is to monitor a group of small-cap stocks that you like and wait to pick up or add to a position should the stock decline significantly.

An example of this a few months back was Brown Shoe Company, Inc. (NYSE/BWS), which fell to a 52-week low of $11.89 on March 17, but has since been trending higher, trading at $17.43 intraday on June 5 — up a remarkable 47% in about three months at an annualized return of about 188%. These types of situations occur more frequently than you may think, but you need to monitor the market closely on a daily basis.